OREANDA-NEWS. Fitch Ratings has affirmed the Russian Republic of Tatarstan's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB' and Short-term foreign currency IDR at 'F3'. The National Long-term rating has been affirmed at 'AAA(rus)'. The Outlooks on the Long-term ratings are Stable.

KEY RATING DRIVERS
The affirmation reflects Tatarstan's well-diversified economy, strong operating performance in line with Fitch's forecast, prudent budget management and strong liquidity. The ratings also reflect the moderate direct risk with a long maturity profile and contingent foreign currency exposure.

Fitch expects Tatarstan's operating performance will remain sound in 2014-2016 with an operating balance close to 30% of operating revenue. According to pre-closing data, the operating balance amounted to 31% of operating revenue in 2013 (2012:34.3%). The administration has a prudent budgetary policy and curbed total expenditure growth below total revenue increase in 2013. This led to significant narrowing of the deficit before debt variation to about RUB284m in 2013 from a deficit of RUB4.5bn in 2012.

Fitch expects that Tatarstan will record close to a balanced budget in 2014-2015, which will lead to direct risk stabilisation in absolute terms and a decline below 50% of current revenue by end-2014 (2013: 52%), a sound 1.6x the current balance.

At 1 January2014, Tatarstan's direct risk included RUB67.1bn of federal budget loans linked to the investment programme in preparation for Universiade (the student Olympic games held in July 2013 in the City of Kazan, the republic's capital). The maturities of these loans were recently lengthened from 2016 to 2032 with a repayment profile of 10 equal annual instalments scheduled between 2023-2032 and 0.5% annual interest, which eases pressure on interest expenditure.

Contingent risk includes a guarantee of USD250m loan participation notes (LPN) issued by OJSC Svyazinvestneftekhim, a holding company owned by the government and RUB5.1bn of guarantees issued by Tatarstan to several other local companies. The LPNs mature in 2015 and this risk is mitigated by the company's strong cash flows. The republic has an extensive public sector, which includes unitary public companies and majority-owned commercial companies. These companies have stable financial performance, but add some pressure to the budget, including forex exposure.

The republic's economy has a strong industrial base that provides a diversified tax base, so its budget is mostly funded through own resources. Operating revenue is dominated by taxes that are linked to economic performance, so the budget benefited from the stable economic growth in recent years. The administration forecasts steady economy growth of 5.6%-6.7% between 2013 and 2015.

RATING SENSITIVITIES
Maintaining a strong budgetary performance and sound debt metrics in line with Fitch's forecast would be positive for the ratings, if accompanied by positive rating action on the sovereign. Conversely, an unexpected significant increase in market exposure accompanied by a weakening of operating performance with a deterioration of the debt coverage ratio (total risk to operating balance) towards five years would lead to a downgrade.